Diwali approaches
India, the world's second largest gold buyer,typically steps up gold purchases for Diwali which is around mid-November this year. Taking a look at the cumulative return by month over the last 10 years in gold October tends to be a very strong month. The chart below shows that January is very rarely a down month and October tends to end the month more positively than not too. The reason for January's strength is that China, the world's largest gold buyer, steps up purchases for the lunar new year.
Real yields and gold prices move together
One key relationship for gold is that real yields and gold tends to move in tandem. So, this means that a helpful chart to be looking at is the real yields of 10 year US bonds overlayed on a gold chart. The real yield of a US bond is simply the value of the bond once inflation has been factored in. Real yields are currently negative and that is an incentive to hold gold over cash. The relationship is very tight, not foolproof, but helpful.
However, gold has often been falling in times of heavy volatility. So, one area to watch is that heavy equity selling does not return as that can drag gold down with it. The USD strength that accompanies the equity selling is a headwind for gold. Essentially volatility at the moment is an enemy to golds ascent higher. If we see calmer markets then we can reasonably anticipate further gold upside.
